Will Best Buy’s holiday sales help founder’s bid?

Shares surge, but cash flow may be road block to taking company private

By

AndriaCheng

Reuters

A San Francisco Best Buy on Black Friday, traditionally one of the biggest shopping days of the year.

NEW YORK (MarketWatch) — Holiday sales at Best Buy turned out better than feared, giving the struggling electronics chain a boost and possibly fueling founder Richard Schulze’s bid to take the company private.

On the other hand, the results could convince Best Buy management it might have a chance to turn around the chain and demand a higher price later on. Still, with Best Buy’s stock having slumped 45% in the past year, there has been growing support for the company to go private and revamp itself without facing the pressures of a public company. Time for Best Buy to go private?

“Investors may begin to see today’s report as a first sign of potential traction under new CEO Hubert Joly,” said Stifel, Nicolaus & Co. analyst David Schick. “Incremental evidence (Best Buy) is a more resilient business may help Richard Schulze persuade private equity partners to join him in an offer for the company.”

Best Buy in December amended an agreement with Schulze to allow him to review the company’s books and bring an offer after the critical holiday season.

Best Buy
BBY, -0.34%
said holiday comparable sales in the nine weeks ended Jan. 5 fell 1.4%, compared with an average decline of 3% in a Retail Metrics poll. Meanwhile, U.S. sales were flat, compared with an expected decline. Online sales, however, surged 10%. Its international segment, hurt by weakness in Canada and China, was a weak spot, posting a 6.4% drop.

“The improved performance in what appeared to be a challenging holiday season will increase hopes over Best Buy’s ability to sustain sales and market share,” said Sanford C. Bernstein & Co. analyst Colin McGranahan.

Best Buy shares jumped 12% to $13.65 in midmorning trading, making the stock the biggest gainer in the S&P 500 index
SPX, +0.18%
.

Best Buy, like its rivals including GameStop Corp.
GME, -1.52%
and RadioShack Corp.
US:RSH
has been hurt by lower sales of traditional electronics such as flat-panel televisions and videogames. The sector also has been plagued by increased online competition led by Amazon.com Inc.
AMZN, +0.34%

Meanwhile, consumers armed with smartphone devices to comparison shop while at stores also has made Best Buy among the most vulnerable to the so-called showrooming effect. GameStop earlier this week reported a 4.4% decline in same-store sales for the nine-week period ended Dec. 29, and said fourth-quarter profit will be at the low end of its current guidance range. See story on GameStop.

“Consumer electronics remain trapped in a weak product cycle,” said Stephen Baker, an NPD analyst. “The inability of the CE market to find substantial new pockets of revenue looms menacingly over the industry’s future.”

In a separate release, NPD said videogame sales in December plunged 26% despite the introduction of Nintendo’s new Wii U console.

Best Buy, in response, has been shifting focus to mobile device and accessories sales, services and appliances sales.

Cash flow worry

While Best Buy’s sales turned out better than expected, there was a negative twist that may impede Schulze’s bid: The company lowered its free cash flow guidance for the second time since November to about $500 million from a November range of $850 million to $1.05 billion.

Best Buy said the reduction was because of earlier-than-expected receipts of merchandise as well as a shift to some products that have shorter payment terms.

The cash flow guidance “is another negative for the (company to be) taken private,” said Citigroup analyst Kate McShane, adding she kept a 20% probability that Schulze’s bid may be successful given the better-than-expected sales.

Other analysts said the cash flow guidance will make it harder for Schulze to line up necessary financing.

“While we believe the holiday sales indicate the new senior management team has begun to stabilize the business, we are troubled by the reduced free cash flow guidance,” said BB&T analyst Anthony Chukumba.

Best Buy said higher U.S. demand for mobile phones, tablet and e-reader devices and appliances helped to offset lower sales of televisions, computers and videogames. Chief Executive Hubert Joly also credited the company’s holiday price-matching policy, increased employee training and merchandise assortment. See related story of Joly’s sense of urgency and holiday strategy.

“Secular challenges remain meaningful, yet we expect new CEO Hubert Joly and CAO/CFO Sharon McCollam to move with a greater sense of urgency to reduce costs and reallocate margin investment to drive traffic and sales,” said ISI Group analyst Greg Melich.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.